Business

Panel for due diligence norms

MUMBAI APRIL 5. A consultative group constituted by the Reserve Bank of India has recommended establishment of appropriate due diligence procedures for appointment of directors on boards of public and private sector banks.

The group of directors of banks and FIs, in its report to the RBI, suggested appointment of one more whole-time director on the boards of nationalised banks and setting up of nomination committees of bank boards to recommend appointment of independent or non-executive directors, an RBI release said here today.

According to banking sources, this recommendation would mean that the Government would no longer be able to appoint directors on bank boards.

The group, under the chairmanship of A. S. Ganguly, director of RBI central board, also suggested building and creation of a pool of professional and talented people for board level appointments in banks and maintenance of data for this purpose by the RBI, it said.

The recommendations also focus on the role and responsibilities of independent and non-executive directors, their training and remuneration, commonality of bank directors and non-banking finance companies, information flow to and from the board and composition of financial committees of the board.

The RBI said it was considering the recommendations of the group in consultation with the Government.

The group also suggested that banks could be asked to come up with a strategy for implementation of governance standards recommended. Once the strategy is received from all banks, a periodical review of the progress of its implementation could be undertaken.

The group said in the present context of banking becoming more complex and knowledge-based there was an urgent need for making the boards more professional by inducting technical and specially qualified individuals.

In the case of private sector banks, where promoter directors may act in concert, independent or non-executive directors should provide effective checks and balances to ensure that banks do not build up exposure to entities connected with the promoters or their associates, it said.

In view of the existing level of remuneration being grossly inadequate, the group said in commensurate with their time required to be devoted, the compensation may include stock options.

The mid-term review of monetary and credit policy for 2001-02 had announced the setting up of the committee to look into the role of directors of banks and FIs and make recommendations for consideration by the Government and the RBI for making it more effective to minimise risks and over-exposure.

The group was also to obtain feedback on the functioning of the boards vis-a-vis compliance, transparency, disclosures and role of audit committees.

The group said it would be desirable if exposures of a bank to stockbrokers and market makers as a group, as also exposures to other sensitive sectors such as real estate are reported to the board regularly.

The disclosures in respect of progress made in putting in place a progressive risk management system, risk management policy, strategy followed by bank, exposures to related entities, asset classification of such lendings/investments and in conformity with corporate governance standards be made by banks to board at regular intervals as prescribed, it said.

The group desired to separate the office of chairman and managing director in respect of large sized public sector banks to bring about more focus on strategy and vision as also the needed thrust in the operational functioning of the bank's top management.

It said the statutory prohibition of the Banking Regulation Act on lending to companies in which the director is interested, severely constricts availability of quality professional directors on bank boards.

Internationally, banks are permitted to extend credit facilities to companies in which the directors are interested subject to full disclosure and appropriate convenants. — PTI

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